Reprinted with permission from the September 15, 2003 edition of the New York Real Estate Journal

Even If Unsigned, Contracts Still May Be Enforceable

By: Walter J. Gumersell

[Author Bio: Walter J. Gumersell is a Partner in Rivkin Radler LLP's Corporate Practice Group, concentrating his practice on general corporate and business counseling with particular emphasis in the securities, mergers and acquisitions, banking, commercial real estate, and corporate tax areas. He may be reached at walter.gumersell@rivkin.com.]

In New York, when parties negotiating an agreement contemplate that a signed writing is required before their agreement will be enforceable, there generally is no binding contract until the parties actually sign an agreement. This rule yields, however, when the parties have agreed on all contractual terms, only have to commit them to writing, and there is no positive agreement that the contract must be in writing and signed. When this occurs, a contract may be effective at the time an oral agreement is reached, even though the parties never reduce the agreement to writing and even though they never sign it. In other words, where all the substantial terms of a contract have been agreed on, there is nothing left for future settlement, and there is no positive agreement that the contract will be binding only if reduced to writing and signed by all parties, the fact, alone, that it was the understanding that the contract should be formally drawn up and put in writing generally will not leave the transaction incomplete and without binding force.

This issue arose recently after AIH Acquisition Corporation began negotiating for the purchase of Alaska Industrial Hardware, intending that the negotiations would culminate in a Stock Purchase Agreement. The parties had extensive discussions. Moreover, AIH spent substantial sums to conduct its due diligence. Then, after the parties had exchanged what they agreed was a final version of the Stock Purchase Agreement which only needed signatures the following day, Alaska's majority shareholder suddenly refused to sign.

AIH brought suit against Alaska in a federal district court in New York. In response, Alaska asked the court to dismiss the complaint.

In its decision, the court pointed out that AIH's counsel had sent an e-mail to Alaska's counsel stating, "Attached is the final SPA. Everyone, including the lawyers, has stated it is final without qualification. Please endeavor mightily to have the SPA executed tomorrow. Thank you for your efforts." In the court's opinion, it was clear from this and from the other evidence that the parties' agreement was -- and that the parties were in agreement that it was -- final. The court then ruled that it was binding even though signatures had not been affixed. The court ruled that the seller was required to sell its business to the purchaser even though the contract was not signed. According to the court, the absence of signatures was a "ministerial formality" that did not affect the contract's enforceability.

The court's decision might have been different if the parties had agreed that there would be no enforceable agreement until it was reduced to writing and formally executed. But when parties have more than an oral agreement -- when they essentially have a complete written agreement containing all material terms in final form with signatures coming as a formality -- even an unsigned document might be enforced by the courts.

The court's ruling points out the importance of having a positive written statement that there cannot be an enforceable agreement unless there is a signed written agreement. In the negotiation of a simple contract a clause in a letter regarding the contract should be sufficient. In the context of the acquisition or sale of a business this type of clause should be in the letter of intent or the agreement in principle. A letter of intent or agreement in principle is an agreement that outlines the acquisition transaction for both parties. It is generally not binding, except for provisions regarding confidentiality, an exclusive period of negotiation, and maybe a provision regarding costs. One of the material terms of a letter of intent or an agreement in principle is a term that that states that the letter of intent or agreement in principle does not constitute a binding commitment regarding the acquisition transaction itself and that a binding commitment or agreement will result only from the execution and delivery of a definitive written acquisition agreement and related documents.